Why An Equity Audit Is Your Best Defense Before You Need One: Lessons Learned From Activision Blizzard, Inc.

Key Takeaways

This article explores:

• How recent sexual harassment and discrimination allegations against Activision Blizzard, Inc. show the great legal and reputational costs that can come from failing to deal with systemic culture issues early and aggressively 
• How Dechert has crafted an effective equity audit offering  
• How investing in an equity audit can help avoid liability and scrutiny 
• Why selecting the right auditor is paramount to a successful equity audit 
• Why companies should promote and foster diversity, equity, and inclusion as part of an effective compliance strategy 
• The call to action for companies to focus on diversity, equity, and inclusion

The Activision Lawsuits

Allegations that a company has fostered a “toxic” workplace culture, or has otherwise failed to provide its employees with an equitable and inclusive work environment, are no longer considered routine “personnel” or “employee relations” issues. More recently, and especially since the protests following George Floyd’s death last summer, allegations of systemic diversity, equity, and inclusion failures — like, for example an allegation that an organization allowed a culture of disrespect to flourish by failing to investigate or effectively remedy complaints about problematic conduct from supervisors — have become major developments that, when revealed, attract media attention. Once allegations like these are publicized, the company’s response (or failure to respond) to the crisis can lead, at best, to increased and potentially prolonged public scrutiny of its cultural issues and corporate practices. At worst, this kind of publicity can lead to the kinds of interventions by government agencies, or by private parties through litigation, that can cause other harms, including permanent injury to the company’s brand.

Activision Blizzard, Inc. (“Activision”) is the most recent cautionary tale and exemplar for why equity audits can be a company’s best defense before they need one. Allegations of pervasive discrimination and harassment of minority and women employees at Activision, the popular gaming company known for World of Warcraft and Call of Duty, have recently dominated the tech world news cycle. Activision’s alleged failings have been laid out in complaints filed by the company’s shareholders and the California Department of Fair Employment and Housing (“DFEH”). The complaints describe a “frat boy” culture at Activision and detail instances in which male employees subjected female co-workers “to numerous sexual comments and advances, groping and unwanted physical touching, and other forms of harassment.” Women of color are alleged to have been subjected to disparate treatment. The DFEH complaint also specifically describes Activision’s failure to meaningfully address pay equity concerns, despite taking the step of hiring two firms between 2015 and 2017 and 2018 to provide analysis relating to compensation data. 

Activision has begun the difficult task of publicly addressing the allegations raised by the complaints. Activision’s CEO, Bobby Kotick, recently sent a letter to the public, shareholders, and employees stating that the company is committed to doing “everything possible to … build the kind of inclusive workplace that is essential to foster creativity and inspiration.” In the same letter, he announced the company’s decision to hire a law firm to “conduct a review of policies and procedures to ensure that” the company will “have and maintain best practices to promote a respectful and inclusive workplace.” 

What Matters When Crafting an Audit 

The company’s audit strategy has drawn scrutiny both from employees and shareholders. For example, in a letter to company leadership, Activision’s employee advocate group, ABK Workers Alliance, has criticized the law firm selected by the company, citing its pre-existing relationship with the company and its executives, and its track record of anti-labor and anti-union work. The group has requested that the auditor be selected by an employee-led diversity, equity, and inclusion task force. Similarly, one of Activision’s shareholders, the SOC Investment Group, in a letter to the board’s lead independent director stated that “the lead investigator does not have in-depth experience investigating workplace harassment and abuse, and the scope of the investigation fails to address the full range of equity issues.” The shareholder called for the audit to be “a company-wide Equity Review” to address “inequities rooted in gender, gender-identity, sexuality, and race.”

The criticism of Activision’s audit approach is emblematic of the need for audits to have the support of key stakeholders, like employees and shareholders. To set up an audit for success, it should be crafted with input from relevant stakeholders. It should also be conducted by fair, impartial, and qualified auditors and be designed to systematically address issues that can lead to real and sustainable change. Dechert’s own approach to equity audits reflects these guiding principles. 

Crafting a Successful Equity Audit — Dechert’s Approach 

Dechert has developed a cross-practice equity audit that leverages the expertise of a diverse group of seasoned HR and investigations lawyers experienced in handling sensitive matters for both employees and companies. Further, to fully capitalize on Dechert’s own strides and learnings, Dechert’s equity audit team is augmented by Dechert’s Chief Diversity, Equity, and Inclusion Officer, who is a veteran in the diversity, equity, and inclusion space. The focus of Dechert’s equity audit offering is to help companies deal with complex and sensitive issues, generate meaningful dialogue, and to make actionable recommendations. 

Guided by these principles, Dechert’s equity audit model is to craft and tailor an audit to each client’s goals and needs. Dechert’s approach always starts with conversations with key stakeholders and is supplemented by a continuing dialogue throughout the audit to ensure that relevant stakeholders are active participants in the process. Dechert is also sensitive to the fact that the team should be well suited for the audit and strives to staff matters so that interviewees feel comfortable and safe providing information. For instance, in matters involving racial discrimination and sexual harassment, interviewees may feel more comfortable talking to people of color or women. Having lawyers conduct an audit as opposed to a consultant also brings the benefit of applicable legal privileges, such as the attorney-client privilege. For example, Dechert has worked with several clients in undertaking compensation equity audits using a diverse team of attorneys, staff, and third party forensic economists skilled in conducting multiple linear analyses and experienced in serving as statistical experts. Importantly, these audits are designed to maintain the attorney-client privilege, including with respect to any recommendations regarding pay adjustments.

Dechert’s approach is rooted in the assumption — a conclusion that, in our experience, is shared by our clients — that effectively addressing and managing diversity, equity, and inclusion is of central importance to the success of a company in the 21st century. Investing in processes that effectively inform and lead management’s understanding of the particular diversity, equity, and inclusion challenges their companies face can not only protect company culture and strengthen compliance outcomes but also lead to better company performance. Diverse and inclusive environments are empirically proven to outperform other environments and can help lay the foundation for a strong compliance framework. An inclusive culture, where employees feel valued as stakeholders, is also likely to result in more reporting and the ability of companies to address issues before they become lawsuits or regulatory inquiries. 

However, recognizing that every company’s needs are different, Dechert’s approach is flexible. Dechert’s equity audit model can be designed to examine equity across the board or to focus on discrete areas like pay equity, hiring and retention, the efficacy of diversity and inclusion policies, or any other area of concern. 

Activision Takeaways

Activision’s experience highlights the challenges businesses can face when external forces become the primary drivers of their diversity, equity, and inclusion policies. Activision shareholders’ response is also in line with the growing trend of shareholders becoming activists on issues of diversity, equity and inclusion, and workplace culture issues. A key takeaway from Activision is that equity audits can be most effective when used at the early stage of a problem, rather than in response to demands or pressure. They should be viewed as a useful diagnostic tool, rather than just as a crisis response.

As Dechert previously highlighted in an OnPoint titled, “The Fierce Urgency for GCs to Promote Diversity, Equity, and Inclusion in Response to the Biden Administration & Compliance Best Practices,” the Biden Administration has also endorsed the benefits of equity audits. One of Biden’s first executive orders called for federal agencies to assess the best methods to test equity within six months of the order and called for an audit of selected federal programs to take place within 200 days of the order. 

Congress, too, is following Biden’s lead by scrutinizing the diversity practices of private equity firms. In March 2021, the congressional House Committee on Financial Services sent letters to 31 of the nation’s largest investment firms requesting data on their diversity, equity, and inclusion efforts. The requests included information about workforce/board diversity, use of diverse suppliers, as well as information about any challenges faced in implementing diversity and inclusion policies. The committee described the letters as part of a review to understand “diversity and inclusion performance in the financial services industry.” Congress is also working on a bill that would require asset management firms to give regulators data on their diversity and inclusion initiatives. 

The call to action for corporate America to address discrimination is not likely a trend to go away. As such, companies should proactively seek to capitalize on the benefits that an equity audit can bring. For example, in the case of private equity firms, information obtained through an equity audit can help firms respond to ESG due diligence questions, strengthen corporate governance practices, and lead to attracting and retaining talent. Additionally, for portfolio companies, audits can help with ESG reporting, root out risk and flag areas of improvement, and increase company value. 

In sum, no matter the industry, companies are likely to prevent future liability and reap positive benefits by conducting an equity audit. 

Please feel free to reach out to your Dechert contacts to learn more about Dechert’s unique equity audit offering.